The New HIRE Act Hiring Incentives and Retention Credit. Is Your Spouse Eligible?

A new law can provide you a payroll tax savings for hiring new workers, and may allow you to take advantage of them if you hire your spouse. The Hiring Incentives to Restore Employment Act, P.L. 111-147 provides two tax benefits for employers that hire workers this year: payroll tax forgiveness for hiring unemployed workers and a tax credit for as much as $1,000 for keeping them on the payroll for at least one year.

Under this law qualified employers get to skip paying the employer’s 6.2% share of Social Security taxes on wages paid in 2010 to a newly hired qualified individual. A “qualified individual” is one who:

Begins employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011;

Certifies by signed affidavit or Form W-11, under penalties of perjury, that they haven't been employed for more than 40 hours during the 60-day period ending on the date the employee begins employment with the qualified employer;

Was not hired to replace another employee of the employer unless that other employee left voluntarily or for cause (including downsizing); and

Is not related to the qualified employer in any of the following ways;  an individual cannot be the taxpayer's children or their descendants, siblings or step-siblings, parents or an ancestor of their parents, step-parents, niece or nephew, uncles, or aunts, or in-laws. They also can’t be their dependent. The rules don't mention a spouse.  They also can’t be a person who owns, directly or indirectly, more than 50% of the business.

The payroll tax forgiveness applies only for wages paid to eligible employees who are hired beginning on Mar. 19, 2010 and ending on Dec. 31, 2010. The payroll tax forgiveness doesn't apply for wages paid during the first calendar quarter of 2010. Instead, the amount which would have been allowed during the first calendar quarter of 2010 as a credit is treated as a payment against the employer's payroll tax for the second calendar quarter of 2010.

A qualified employer is generally any employer other than a U.S or state government. However, a public institution of higher education is a qualified employer under the law. An employee can’t be eligible for both the payroll tax credit and the work opportunity tax credit at the same time. If this were the case, the employer would want to elect out of the application of the HIRE act to claim the (generally) more advantageous work opportunity credit.

It appears that you can claim the payroll tax forgiveness if you hire your spouse as a bona fide employee as long as the conditions listed above are met and there are no other family member owners that would disqualify them under the relationship test. Depending on family relationships, there may be instances where a spouse will not qualify for the benefit. For instance, if there are multiple generations of a family as owners, then the corporation can't claim either benefit if it hires the spouse of one of them. In this situation, the wife is treated as related to a more than 50% owner of the business and would not be eligible.

HIRE Act Sec. 102 also provides employers with a credit of as much as $1,000 for retaining qualified workers under the above rules.  The workers must be employed by the employer on any date during the taxable year and employed for a period of at least 52 consecutive weeks, and their wages for this employment during the last 26 weeks of the period equals at least 80% of the wages for the first 26 weeks of the period. Anyone qualified under the payroll tax forgiveness rules should also qualify for the retention credit if they are employed for the required amount of time.

Do you think you have eligible employees? Be sure to consult with a tax professional about your specific situation before claiming this or other credits.